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Stocks: Exchanges & Markets

Thanks to technological advances, the standard notion of a stock market has changed tremendously in recent years. But whether it's housed in a pricey chunk of real estate in lower Manhattan or the vapors of cyberspace, the function of a stock market is always the same: It's the place where buyers and sellers meet to trade stocks.

The two main types of stock markets are exchanges and electronic markets.

Exchanges, such as the New York Stock Exchange and the American Stock Exchange, are physical locations where stock transactions are conducted auction style -- meaning traders try to find the best price. On the New York Stock Exchange, also known as the NYSE or the Big Board, firms give their buy and sell orders to their floor brokers. The floor brokers will either conduct the transaction by themselves by finding an interested party at the appropriate trading post on the exchange floor, or turn the order over to a specialist, who is essentially a broker's broker, finding a party to facilitate a transaction. On any given day, close to 2 billion shares may change hands on the NYSE, which has been around since 1789 and lists close to 2,800 companies' stocks.

The Nasdaq (which stands for the National Association of Securities Dealers Automated Quotation System), the world's first electronic stock market, enables brokers to conduct trades from around the country via telephones and computers. On the Nasdaq, instead of specialists acting as middlemen between buyers and sellers, market makers -- dealers who specialize in a specific stock -- compete with each other over the electronic system to buy and sell a stock. The Nasdaq, which was born in 1971 and lists more than 5,000 stocks, has often traded more than two billion shares in one session.

To be listed on the Nasdaq, NYSE or the American Stock Exchange (or Amex), companies must meet certain requirements regarding market value, assets or earnings. While they vary, in general, the NYSE's requirements are the toughest, which means the NYSE tends to have older, more-established companies. The Nasdaq includes a range of companies, big (such as Microsoft) and small, but it is generally known as a market for emerging companies, with a bent toward technology firms. Indexes such as the Nasdaq Composite Index and the New York Stock Exchange Composite Index track the market value of the stocks listed on these exchanges, which give a barometer of how the broader market is doing. If companies fail to meet the minimum requirements for a sustained amount of time, they will be de-listed.

For companies too small or new to meet the requirements of the larger markets, there is the over the counter market. The OTC market, which is where the majority of U.S. stocks are traded, conducts transactions through an electronic network. Bid and ask prices for these unlisted stocks are posted on the electronic OTC Bulletin Board. Because these stocks are much smaller, trading tends to be thin, or light.

Lastly, there are a slew of new electronic stock markets known as electronic communication networks, or ECNs, that have cropped up in recent years and threaten to challenge the traditional markets and revolutionize how trades are conducted. Orders placed on ECNs match buyers and sellers automatically, removing the "middle man," such as a specialist or market maker, which makes trading cheaper for the investor and the firm. Unlike the exchanges and the Nasdaq, the computer-based ECNs trade beyond normal trading hours.

In 2005, the convergence of the ECNs and more traditional exchanges became entrenched as the NYSE announced
plans to merge
with electronic rival Archipelago. Meanwhile, the Nasdaq said it would
buy the Instinet
electronic trading platform. In turn, those deals triggered a round of consolidation among the smaller regional exchanges.

In addition to covering the daily activity on all the major exchanges,
TheStreet.com also focuses on the trends that are changing the way stock trades are conducted.